SC ruling may provide fillip to FCCB issuances
The Supreme Court on Tuesday dismissed the revenue department’s Special Leave Petition against the Bombay High Court’s judgment with regard to conversion of Foreign Currency Convertible Bonds (FCCBs).
The apex court turned down the revenue department’s assertion that the date of acquisition of the bonds should determine the cost of acquisition, rather than the date of acquisition of the underlying shares.
The decision may give a fillip to FCCB issuances and make it more attractive to investors, said experts. Indian companies issue these convertible bonds abroad to raise money in foreign currency.
“The SC decision affirms the tax position of the 1993 scheme, which covered both FCCBs and ADRs/GDRs. The tax certainty will make FCCBs more attractive to investors as well as issuers,” said Sunil Badala, Partner and Head, Financial Services, Tax, KPMG in India.
The matter pertains to Kingfisher Capital’s subscription to Zero Coupon FCCBs in the Indian company NBVL in 2006, and the subsequent sale of shares received from the conversion of these FCCBs. The apex court observed that the bonds were issued under the 1993 Scheme, which governs the issuance of FCCBs, and not the 2008 Scheme, which pertains to Foreign Currency Exchangeable Bonds.
It is a special type of debt instrument issued in foreign currency
It is a bond with a dual character of debt and equity instrument
It acts like a bond making regular coupon and principal payments and provides investors with an option to convert them into equity
Upon maturity, holders can convert the equivalent value of equity at a set conversion rate
“The special taxing provisions were introduced in 2008, which should not apply to the FCCBs issued in 1993. In absence of such specific taxing provisions, the tax treatment provided by the 1993 scheme would legitimately apply,” said Punit Shah, partner, Dhriva Advisors. “This will clear the doubts regarding the taxability of gains on 1993 scheme bonds and mitigate future litigation.”
A scheme for issue of FCCBs and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme was notified in 1993 to allow the Indian companies to raise money overseas through issue of FCCBs and Global Depository Receipt Mechanism (GDR) and American Depository Receipt Mechanism (ADR).
As per the 1993 scheme, the price of the shares on the date of conversion is to be be considered as the cost of acquisition.
Say the FCCB was priced at $5, which turned into $10 on the date of conversion of the bond into shares. So, $10 is the cost of acquisition, and not the original price of purchasing the bond. So, there is a step up of cost on the date of conversion because the price has moved up.
The Bombay High Court had earlier ruled that the computation of capital gains should be determined from the date of conversion of FCCBs into shares, and not the date of acquisition of the FCCBs. This was challenged by the revenue department.